Monday, August 25, 2014 - Tax Weasels

Tax Weasels
by Sinclair Noe

DOW + 75 = 17,076
SPX + 9 = 1997.92 (record)
NAS + 18 = 4557
10 YR YLD - .02 = 2.38%
OIL - .27 = 93.38
GOLD – 4.60 = 1277.20
SILV - .05 = 19.45

The S&P 500 crossed above 2000 intraday, closing off the high for the day, but still closing in record territory. We recognize it but we don’t have a big celebration. It’s just a number, a nice big round number. For reference, the S&P 500 topped 1,000 back in February 1998.

Economic data today includes:

Sales of new single family homes dropped for a second month in June. New home sales slipped 2.4%, but data from the past 3 months was revised to show 33,000 more new homes were sold than previously reported. The median sales price increased 2.9% from a year ago. At July’s sales pace it would take 6.0 months to clear the supply of houses on the market, the highest since October 2011. Tomorrow, we’ll see the latest data on existing home sales from S&P/Case-Shiller.

Separately, financial data firm Markit said its preliminary services Purchasing Managers Index dipped to 58.5 this month from 60.8 in July.A reading above 50 indicates expansion.

Last Friday ECB President Mario Draghi delivered the luncheon speech at the Jackson Hole Symposium; Draghi said the ECB had done all it could for now and the governments of the EU needed to step up. Today a survey was published from the National Association for Business Economics and the conclusions show most economists surveyed think the Federal Reserve’s monetary policy is on track but the US needs to enact structural policies in order to stimulate stronger economic growth.  The Fed’s expansionary monetary policy has been at odds with a sharply restrictive fiscal stance that saw budget deficits declining from 11% of GDP in 2009 to less than 3% this year.

Economists overwhelmingly expect the Federal Reserve to hold off raising short-term interest rates until at least 2015. But nearly a third say doing so would mean the central bank waited too long. While many economists appear at ease with the “steady-as-she-goes perspective” from the Fed, “almost 40% say the stimulus policies are no longer necessary and should be curtailed or sunset.” On other topics, business economists say immigration reform is one of their top priorities, and the US needs to let more immigrants in. Meanwhile, the economists surveyed support the idea of lifting the ban on exports of US-produced crude oil and nat gas. The industry is pushing for the right to export more fuel overseas to ease the threat of overproduction, a move that could also help reduce the US trade deficit. The White House moved this summer to loosen restrictions on crude exports, but an outright end to the ban faces higher hurdles, and would require Congressional approval.

A new academic paper from economists from the University of Chicago and the University of Maryland suggest the weakness in employment is not just a result of the Great Recession, but a longer-term structural change in the economy; the share of Americans with jobs has declined because the labor market has stagnated in recent decades; fewer startups creating new jobs; fewer people losing or leaving jobs, fewer people landing new ones. This suggests the US has been headed to higher unemployment even before the financial crisis, and even if we add jobs, we still have problems that can’t be overcome by Federal Reserve monetary policy alone. The paper says that a 1 percentage point decline in the churning of the labor market lowers the employment rate by 0.77 of a percentage point, a huge effect.

It’s Monday, and so we have some mergers to cover. The Swiss drug maker Roche agreed to buy InterMune for $8.3 billion. InterMune is based in California; it has one drug called pirfenidone to treat idiopathic pulmonary fibrosis, a fatal scarring of the lungs. It is licensed to sell the drug in Europe, and hopes to get approval in the US later this year. About $87 billion in pharmaceutical acquisitions were made in the first half of this year, eclipsing the total for all of 2013.

If you are Canadian or have ever been to Canada or know Canadians, then you probably know Tim Hortons; it’s a chain of coffee and donut shops; kind of like Starbucks but the coffee is actually good. And it may be the new home of the Whopper. Burger King wants to buy Tim Hortons. If completed, the deal would mean Burger King’s corporate headquarters would move to Canada, where it would qualify for a corporate inversion, with the idea of lowering Burger King’s corporate tax bill. The actual headquarters and the executives go nowhere, but the nominal address changes so the company can avoid US tax rates. Burger King says the deal is not about the taxes, but about the coffee, and the fast food breakfast business. Coffee may be an especially important attraction for Burger King and its majority owner, the Brazilian investment firm 3G Capital. In Tim Hortons, Burger King would be getting a restaurant chain that is essentially synonymous with coffee in Canada. Yea, that’s the reason; it’s the coffee, not the taxes; or maybe they’re trying to create a new donut-burger. Yea, that’s it. They’re just trying to compete with waffle tacos and sausage pancakes.

With the 15% nominal rate in Canada, this is absolutely a move about taxes; rooted in the lie that American corporations pay the highest tax rates in the world, which is not true when you consider the effective rates rather than nominal rates. When it comes to effective rates, what corporations actually pay, the US ranks 17^th out of 27 developed countries. Walgreens recently scrapped an inversion deal because of public blowback. Once one of these brands pulls off an inversion deal without blowback that actually hurts sales, it will be a run for the exits.

There are so many companies trying to weasel out of taxes that the inversion trend is the hot new thing on Wall Street, so hot that JPMorgan is backing a new online broker that has bundled up 25 companies seen as inversion targets. The basket of companies is called the Tax Inversion Targets, or TIT; I am not making this up. Count on JPMorgan to go for the most weasely product and then tack on a bit of tacky.

Late Friday, Goldman Sachs agreed to buy back $3.15 billion in mortgage bonds from Fannie Mae and Freddie Mac to end a lawsuit filed in 2011 by the Federal Housing Finance Agency. The FHFA accused Goldman of dumping low-quality mortgage bonds during the run-up to the financial crisis. Goldman is not paying a penalty, but it is estimated the bonds are worth only about $2 billion today. Last month, lawyers for the FHFA presented evidence showing that Goldman was aware of weakness in the subprime mortgage market but did not pass that info to clients buying subprime bonds, even as Goldman was shorting the bonds. Just to be clear, Goldman was selling the bonds and simultaneously betting the bonds would fail.

AP is reporting that a column of Russian tanks and armored cars crossed into Ukraine’s far southeast, which is away from the fighting that has been taking place. The markets have been worried about a Russian invasion of Ukraine; now it looks like it is happening, and the markets seem to discount it.

ISIS, has been fighting in Iraq, and even though US airstrikes are inflicting damage, they are still entrenched. Meanwhile, they have taken over a key government airbase in Syria. BBC says government forces evacuated the airbase. Syrian state television confirmed that government troops had lost control of the base. The US has not been targeting airstrikes against ISIS in Syria.

Twice in the last seven days, Egypt and the United Arab Emirates have secretly teamed up to launch airstrikes against Islamist-allied militias battling for control of Tripoli, Libya. Responsibility for the airstrikes was initially a mystery. After the first set, several American officials initially said that signs pointed to the United Arab Emirates, but clearly American intelligence was surprised.

Workers are assessing quake damage and starting to clean up after a 6.0 magnitude quake in Napa California; it was the strongest quake in the San Francisco area in 25 years. Approximately 172 people were treated for mainly minor injuries; two people had serious injuries; no deaths have been reported. Several building were badly damaged and a mobile home park caught fire. The biggest economic damage may come to wineries.

Meanwhile, a large 6.9-magnitude earthquake has struck a sparsely populated area of central Peru. There were no immediate reports of damage or injuries, and authorities were still surveying the region.

Hackers again showed how powerful electronic attacks can be when they forced Sony's PlayStation Network and Blizzard's Battle.net offline over the weekend. The same group responsible for shutting down the gaming platforms, which calls itself the Lizard Squad, also claimed credit for sending a bomb threat via Twitter that grounded a plane carrying Sony Online Entertainment president John Smedley. The plane was traveling from Dallas to San Diego but was diverted to Phoenix. No bomb was found.

Earlier this month, the computer systems at 51 UPS stores were found to have been infected with malware that could potentially allow criminals to gain access to consumer data. The FBI says that up to 1,000 retailers could have malicious software on their sales systems, potentially exposing sensitive information to identity theft and financial fraud.

And that raises the question of why companies continue to get hacked? The most probable answer is that corporate executives just don’t want to spend the money on security because they consider it a cost without a financial benefit; at least until after the fact.

And finally, John Sperling has died at the age of 93. Back in 1978, Sperling founded the University of Phoenix. The University of Phoenix has a presence in 38 states and in Puerto Rico, and at one point touted 242,000 students, although that number has significantly dropped. Sperling became a billionaire, and he used his wealth on several philanthropic projects, including research into seawater agriculture and anti-aging medicine. He was also an outspoken critic of the government's war on drugs, advocating for treatment instead of criminalization.

Thursday, June 19, 2014 - Market Hits Record Highs and Supreme Court Hands Down More Decisions

Market Hits Record Highs and Supreme Court Hands Down More Decisions

By Sinclair Noe

DOW + 14 = 16,921
SPX + 2 = 1959
NAS – 3 = 4359
10 YR YLD + .01 = 2.62%
OIL + .48 = 106.07
GOLD + 42.80 = 1321.30
SILV + .86 = 20.86

Taking a look at economic data, weekly claims for jobless benefits fell 6,000 to 312,000; the labor market still has plenty of slack but still shows signs of modest improvement. The Philly Fed manufacturing index was up to its highest reading since last September. And the Conference Board's index of leading economic indicators rose 0.5% to 101.7 in May.

President Obama said today that the United States would deploy up to 300 military advisers to Iraq to help its Iraqi government forces fend off Sunni militants. Obama emphasized again that he would not send combat troops to Iraq, although there seems to be a fine line between combat troops and advisers; he said the United States would help the Iraqis “take the fight” to the militants, who he said pose a threat to Iraq’s stability and to American interests, because Iraq could become a sanctuary for terrorists who could strike the United States or its allies.

Secretary of State John Kerry will go to Europe and the Middle East this weekend to build support among Iraq’s Arab neighbors for a multisectarian government in Baghdad.

Markets were in negative territory most of the day, nothing big, then we recovered near the end of the session, nothing big; the S&P 500 hit its 21^st record high close of the year. This market is just slowly scratching and clawing its way higher, and that’s a good thing. When the markets go on a sharp move higher, sometimes called a parabolic run, it usually ends with a nasty fall. For now, the markets are moving higher but staying within the channels of standard deviation.

There are plenty of geopolitical hotspots, and a boatload of economic uncertainty, but the US equity markets are as constant as you could want. The past 44 consecutive sessions of the Standard & Poor's 500 index have fluctuated upward or downward by less than 1 percent. To put that streak in context, the S&P 500 hasn't seen this little movement since 1995, when the index didn't change by a full percentage point for 95 days. All the while, stocks have been steadily ticking up. The S&P 500 is up 6% year-to-date.

There always seems to be a crisis somewhere and maybe investors and Wall Street traders are just crisis weary, even if it is a little dangerous to wait for the next hotspot to implode. Ukraine hasn’t resulted in disaster, at least not for the US. We’ve been dealing with a mess in Iraq for more than 10 years, so there’s no reason to freak out now. The full impact of recent world events is still unclear, so just keep trading. Compared with past conflicts in the Middle East, America has reduced its dependence on oil in the region and thus may not be feeling the effects of the current crisis as strongly.

The Federal Reserve’s QE policy has been a tremendous success for Wall Street, even if it hasn’t trickled down to Main Street. Impressive corporate earnings growth may be outweighing any effects that world events are having on the markets. Earnings of companies in the S&P 500 are expected to growth by a rate of 5.4% in Q2 2014, with nine of the ten sectors in the index projecting higher growth than last year.

Yesterday, Fed Chairwoman Janet Yellen dismissed inflation as nothing more than noisy. Wall Street traders loved the dismissal of rising prices as an indication that the Fed would not be swayed from their ongoing accommodative policy. Still, you have to wonder where the Fed is going as they try to oversee an uneven recovery and a benign exit from QE.

Like the Fed, the Bank of England has kept interest rates in the near zero range for the past 5 years. Last week, BOE Governor Mark Carney indicated that economic liftoff might come sooner than the markets think. Unemployment in Britain has been falling faster than expected, even though there is still considerable slack in the labor market. British GDP has steadily risen over the past year and is now just 0.6% below its pre-crisis peak. The improving picture could nudge the BOE toward a rate increase sooner rather than later. And so the BOE has its own form of forward guidance, stressing that the timing of the first rate increase is less important than the idea that once rates increase, the degree and pace of increases will be gradual and limited; in other words, a soft and gentle slope.

The Supreme Court is handing down decisions this week. Today they issued a unanimous ruling on Alice Corp v. CLS Bank International, a case that deals with patents. Alice Corporation, an Australian company developed a method for mitigating settlement risks among multiple parties. In its Supreme Court brief, the company said the method was eligible to be patented largely because it involved shadow records updated in real time that “require a substantial and meaningful role for the computer.”

The patents were challenged by CLS Bank International, which says it clears $5 trillion in foreign exchange transactions a day using methods to ensure that both sides performed. The bank said that Alice Corporation’s patents merely recited “the fundamental economic concept of intermediated settlement of escrow.”

A trial court invalidated Alice’s patents and then a court of Appeals affirmed the lower court ruling. Writing for the Supremes, Justice Clarence Thomas said that was “a patent-ineligible abstract idea,” and “Merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.”

The case had been closely watched by the software industry. Patent claims over the way ideas are incorporated into computers, cellphones and other devices have become a challenge for many high-tech companies. Justice Thomas indicated that the decision posed no threat to the concept of software patents, writing: “There is no dispute that many computer-implemented claims are formally addressed to patent-eligible subject matter.”

The Supremes were also unanimous in ruling on United States v. Clarke; in this case the Court held that a taxpayer may conduct an examination of IRS officials in response to a summons for information and records if the taxpayer can point to facts or circumstances that could raise an inference of bad faith on the part of the IRS.

Another unanimous ruling says the First Amendment protected an Alabama whistleblower. In Lane v. Franks, the high court ruled that Edward Lane's First Amendment rights protected him from job retaliation when he testified in the public corruption trial of then state Rep. Sue Schmitz in 2010, who was accused of being on the payroll at the college but failed to actually show up for work. Schmitz’ bogus job was uncovered and detailed, along with many other cases of corruption in the state's two-year college system as part of a two-year investigation of the system by The Birmingham News in 2006-07.

 Lane was fired by the two-year college he worked after his testimony. Lower courts had ruled against Lane, finding that he was testifying as a college employee, not as a citizen. Writing for the court, Justice Sonia Sotomayor said Lane's testimony was constitutionally protected because he was speaking as a citizen on a matter of public concern, even if it covered facts he learned at work. The decision is a win for whistleblower advocates, who said it could encourage more government workers to cooperate with prosecutors in public fraud cases without fear of losing their livelihoods.

Meanwhile, there is still some fallout, and uncertainty surrounding a Supreme Court decision earlier this week involving sovereign debt of Argentina. Argentina defaulted on nearly $100 billion of debt in 2002. Because some of the debt was sold under New York law, it faced a court challenge after it settled with only some creditors in 2005 and 2010. A few “hold out” creditors sought better repayment terms, specifically, some hedge funds bought the debt after the 2002 default for pennies on the dollar and then demanded full payment. The president of Argentina has called the hedge funds, “vultures” The Supreme Court has given the vultures a victory.

In the next 10 days, we’ll see if Argentina will succeed in defying the United States courts. On June 30, there is a scheduled interest payment on a set of Argentine bonds that its government wants to pay. But the courts say that interest may not be paid unless the country pays all it owes on bonds it defaulted on years ago, something Argentina says it cannot and will not do.

Argentina’s plan is to convert the bonds on which it wants to make payment into new bonds that would not be subject to New York law. Several banks and other financial institutions were willing to accept a partial payment but now that might risk the ire of American courts.

There is no equivalent to bankruptcy law for sovereign debtors. There is no legal procedure to resolve debts of destitute countries. There is no court to approve a restructuring plan that will wipe out some debts and convert others to equity, as there is for companies. Instead, troubled countries negotiate with lenders to restructure the debts. That restructuring could involve reducing the amount owed, lowering the interest rate, extending the maturity of the debt or some combination of the three.

The IMF would typically work with poor countries by offering emergency money contingent on financial reforms for the country; the IMF money was understood to rank above the old debts. Bondholders could, and did, hold out for full payment, but they faced the risk that the restructuring would go through and those who agreed would get partial payouts, while the holdouts got none. Now it has changed, at least for countries that issue bonds under New York law. The hand of holdouts has been strengthened immensely. Financial market service providers are now sovereign debt enforcement agents.

What would happen then? In a brief submitted to the Supreme Court, Joseph Stiglitz, the Columbia University professor who was formerly chief economist of the World Bank, offered a warning: “Unable to restructure, governments that default would be permanently shut out from the debt market, with consequential adverse effects on development and economic growth prospects.” In other words, a modern day debtors’ prison for countries with oppressive debt.

We’ll see how this one unfolds.

Friday, May 23, 2014 - Always Double Check Your Spreadsheets

Always Double Check Your Spreadsheets
by Sinclair Noe

DOW + 63 = 16,606
SPX + 8 = 1900
NAS + 31 = 4185
10 YR YLD - .02 = 2.54%
OIL + .67 = 104.41
GOLD - .80 = 1293.90
SILV - .01 = 19.58

The S&P 500 Index closed at a record high of 1900.53. It was a record high close but not a record high considering intraday pricing. The S&P hit an intraday high of 1902 on May 13, however it closed on that day at 1897. Today, the intraday high was 1901, but I’ve always considered the close to be a more significant number than the intraday high. Since the start of the year we’ve been on a roller coaster ride in the markets, but as of today the Dow is up 0.2% year to date, the Nasdaq is up 0.2% for the year, and the S&P is up 2.8% since the start of the year.

If you are a regular, you might wonder why we aren’t celebrating a record high. The first answer is that 1900 is just a number with no special significance; the second answer is that we only celebrate when the Dow Industrial Average hits a record high, and the last record high close on the Dow was May 13 at 16,715. We don’t celebrate S&P records, and like so many things, the reasoning is entrenched in archaic traditional dogma.

An example would be Memorial Day, which started after the Civil War as a way to commemorate the soldiers who died while in military service. The holiday was originally known as Decoration Day, a day to place flowers or other such decoration on the graves of the fallen soldiers. It seems like some sort of twisted ritual when today we have such little respect for our soldiers that we can’t even provide timely health care in a VA hospital. Maybe this Memorial Day we can all contact our elected representative.

You can send an email by going to contactingthecongress.org, or the main phone number for Congress is 202-225-3121. I hope you could contact at least one of your elected officials and tell them to take immediate action to straighten out the problems at the VA before we lose another soldier. I really don’t care if you are republican or democrat or something else; this is not a red or blue issue, it’s a red, white, and blue issue.

In economic news, the Commerce Department reports sales of new single family homes rose 6.4% to a seasonally adjusted rate of 433,000 units in April. The rise ended two straight months of declines. The inventory of new houses on the market increased 0.5% to 192,000 units, the highest level since November 2010. Nevertheless, the stock of new houses on the market remains more than 50% below its pre-recession level.  At April's sales pace it would take 5.3 months to clear the supply of houses on the market, down from 5.6 months in March. With inventories rising, the median price of a new home fell 1.3% to $275,800 from April last year.

According to Freddie Mac, rates on fixed 30-year mortgages fell to an average of 4.14% this week, a near seven-month low. And mortgage rates almost certainly play a very big role in the housing market and according to a new report from Deutsche Bank they explain the current weakness in the housing market. 

Last year rates spiked as the markets threw a taper tantrum, a strong reaction to the possibility the Fed would exit QE. Mortgage rates bumped up one percentage point, not a huge move, but on a percentage basis, it was more than 30%. Sharp spikes in mortgage rates tend to produce “extended periods of weakness in housing” that last several quarters historically. The current cycle hasn’t disappointed on that front. But they also find that most housing indicators have actually fared better in the recent episode relative to the historical experience.

With the caveat that all real estate markets are local, most indications of housing supply show that markets have returned to pre-crisis and even pre-housing boom levels. Housing demand is improving gradually, though household formation levels have disappointed many analysts so far.

This week Russian President Putin traveled to China to ink a deal to sell natural gas to the China over the next 30 years. Meanwhile negotiators from the US and the Eurozone very quietly began their fifth round of negotiations on the Transatlantic Free Trade Agreement, also known as the Transatlantic Trade and Investment Partnership. Text from the private negotiations has leaked out, but nothing is official yet. Big Oil and Gas is looking at the situation in Europe and seeing a big opportunity, and so they are trying to remove restrictions on the export of energy goods.

For example, any request for an export license to ship natural gas from the US to the EU would be approved “automatically”, even if it means increased gas prices for US consumers, increased dependency of imports to the US, or potential environmental damage. While it would lock in more business for Big Oil, it’s hard to see how this helps the goal of US energy independence or the broader public interest.

The EU’s ideas for free trade in energy with the US would also be a frontal assault on the possibility for governments to impose a “public service obligation,” requiring utility companies to deliver natural gas at certain prices to consumers, for example. Any such public service obligation should be “clearly defined and of limited duration” and also not be “more burdensome than necessary.” In other words, if we have a cold spell in the US and local utilities need natural gas, we could be forced to ship it to Europe, even if for a limited duration.

Sunday brings a presidential election in Ukraine. Putin says he will honor the results, saying Russia will "respect the choice of the Ukrainian people" in the election and will work with the new leadership.  but the results may be a tricky thing; we still don’t know if they will actually be able to handle balloting in eastern Ukraine. And if there is not a clear majority winner, there would be a runoff election in June.

Have you read the new book on economics, “Capital in the Twenty First Century”, written by French economist Thomas Piketty? It’s a big, thick book and a bestseller that has started multiple and running debates. Piketty's book claims that inequality will return to the heights seen in earlier centuries (think the Gilded Age or the French Revolution) unless governments intervene. The best-selling book has been embraced by liberals as a call to action against inequality, and attacked by conservatives as a call for socialism and wealth redistribution. And so a couple of journalists for the Financial Times, Chris Giles and Ferdinando Giugliano did some fact checking and they claim some of the facts are less than factual.

Giles noted what he described as fundamental problems with some of Piketty's numbers on wealth inequality. Giles wrote: "I discovered that his estimates of wealth inequality -- the centrepiece of Capital in the 21st Century -- are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air."

Giles also said that the spreadsheets Piketty provided as source material for his book have "transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source."

In his detailed response, Piketty did not confirm or deny that there were any big errors in his data, but said his raw data sources had to be adjusted in some cases to paint a smoother picture, or to fill in gaps. Piketty wrote:  “I have no doubt that my historical data series can be improved and will be improved in the future, but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements." Piketty also pointed out that subsequent studies have backed up many of his conclusions, including the idea that wealth has become more concentrated in the US in recent decades.

Next week’s economic calendar includes a look at housing prices from Case-Shiller/S&P; the year-over-year increase in prices in 20 major cities has slowed from the recent peak of 13.7% in November 2013, and the trend likely continued in March.

Next Friday, we’ll get a report on personal income; wider coverage as a result of the ACA meant Medicaid benefits accounted for 20% of all personal income gains in the first three months of the year, therefore income excluding Medicaid benefits is probably a more accurate way to look at the data.

The Conference Board will release its confidence survey Tuesday and the University of Michigan sentiment report is set for Friday; an important subset will be how households view job availability.

On Thursday, we’ll see the Commerce Department’s revised estimates of first quarter GDP; you will recall the first estimate showed growth at just at annual rate of 0.1%, which was really bad; the revised estimate could turn ugly, even negative, like maybe down 0.9%. The second quarter GDP is expected to bounce back, but the hole is getting deeper.

Happy Memorial Day Holiday.

Monday, February 24, 2014 - Wine and Neurosis

Wine and Neurosis

by Sinclair Noe

DOW + 103 = 16,207
SPX + 11 = 1847
NAS + 29 = 4292
10 YR YLD + .01 = 2.75%
OIL + .64 = 102.84
GOLD + 10.50 = 1337.60
SILV + .11 = 22.07

The S&P 500 hit a new high today; topping out at 1858; surpassing the intraday high of 1850 set back January 15^th, and finishing at 1847.61, just below the record high close of 1848.38, again from January 15. So, we couldn’t hold on to a record close, but it was tempting. The S&P was banging up against resistance, briefly floating above the ceiling and into new, rarified air. And we would all love to be on that rocket, if it really is going to soar. Patience, patience.

Now, we know that fundamentals, the news of the day, only offers justification for movement, and we know that the fundamentals can also prove to be contrary indicators. Still, the best explanation I’ve heard today for the enthusiasm is the recent M&A activity has created something of a halo effect. There has been quite a bit of merger action. Consider: RF Micro Devices will merge with Triquint Semiconductor in an all stock deal announced this morning, last week was news of Men’s Warehouse upping its offer for Joseph A. Bank conditioned on Bank dropping its bid for Eddie Bauer, Actavis is buying Forest Laboratories, Comcast buying Time Warner Cable in a deal to create the world’s biggest consumer complaint, and Facebook buying WhatsApp.

And suddenly everybody wants to catch the M&A fever. Maybe that explains new market highs, maybe not. What we haven’t seen is an improvement in the economy; blame it on the weather if you wish, but it’s hard to find demand. Households, businesses, governments are all holding onto their money; meaning supply outweighs demand. Another way to look at this is when demand increases, buyers bid prices higher, or you have too much money chasing too few goods, and the result is inflation, and this is usually a sign of an expanding economy. But prices are not inflating.  We saw the CPI and PPI reports last week and what we have is disinflation or perhaps just stagnation; and the economy is just muddling along.

Of course, there are multiple causes of inflation; you might see supply decrease and cost of production increase, and that could push prices higher; this is known as cost-push inflation; you might see demand increase while supply remains constant or drops, and that pulls prices higher; this is known as demand-pull inflation. The Fed has hoped that by throwing money into the banking system, they could increase demand. That hasn’t happened, and so the Fed is backing away from their monetary stimulus scheme and they are cutting back QE.

Last Friday we saw the transcripts of the Fed’s deliberations from 2008, and it revealed policymakers were largely in the dark about the impending meltdown; they were in the dark about how the markets would respond to stimulus; they were in the dark about where and why and to whom they should apply stimulus – they really missed the mark on that count; they were in the dark about how economic models could miss changes in conditions; they were in the dark about the consequences of a meltdown; they are still in the dark to this very day.

So, we’re back to the basics of supply and demand. Throwing money at Wall Street does not increase demand; it does increase mergers and acquisitions and stock buybacks and executive bonuses. And that creates a feverish frenzy among Wall Street traders looking for the next big buyout. Anyway, we hit a high but we couldn’t hold onto it. You can celebrate that record with wine and neurosis.

If you are trying to trade these markets, don’t get caught up in the M&A fever. Follow the trend, not the fad. This means that you will not hit the tops and bottoms in the market. In other words, you will not be exactly right on any given trade; you will be a little late on any given entry and exit, but you will let the technical data, the price action tell you when to buy or sell. You won’t predict where the market is going but rather follow the market. If it sounds a bit stressful, it is. But you have to ask yourself if you want to be right or if you want to be profitable. Or maybe that’s not the question at all. Maybe you should be questioning why you are in the market at all.

If you can make it through a weekend without checking the stock quotes, you might consider not checking the quotes for a week. So says Warren Buffet.

Mere mortals should not try to outsmart the stock market. That’s what Warren Buffet is saying, or writing in his upcoming annual letter to investors. Buffet writes:  "The goal of the nonprofessional should not be to pick winners -- neither he nor his 'helpers' can do that -- but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."

Buffett thinks the best course of action is to take almost no action. Stick to what you know, which is probably nothing. Buy a basket of 500 stocks, a smattering of bonds, and forget about it for the next 100 years or so. Treat investing this way and you'll actually beat the experts in the long run.

Buffett takes a few shots at the hedge fund managers and the newsletter writers and the talking heads on CNBC and similar outlets. Buffett writes: “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments," Buffett writes, adding: "In the 54 years [partner Charlie Munger and I] have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people."

So sayeth the Oracle of Omaha, and he’s right, of course; unless you didn’t get out at the top and prices are collapsing and you’re wondering whether to eat your losses or buy more, and remembering that you don’t have quite the balance sheet of Warren Buffett.

Meanwhile, Defense Secretary Chuck Hagel today outlined a modest proposal to deal with spending caps ahead of the formal budget presentation next week. Hagel has laid out how he will cut spending. The Department of Defense plans to reduce the size of the Army to between 440,000 and 450,000 soldiers, he said. The Army is currently about 520,000 soldiers and had been planning to draw down to about 490,000 in the coming year.

A reduction to 450,000 would be the Army's smallest size since 1940 - before the United States entered World War Two - when it had a troop strength of 267,767, according to Army figures. The Army's previous post-World War Two low was 479,426 in 1999.

The Defense Department is in the process of reducing projected spending by nearly a trillion dollars over a 10-year period. A two-year budget deal in Congress in December gave the Pentagon some relief from the budget cuts, but still forced it to reduce spending in the 2014 fiscal year by $30 billion. The Pentagon's budget for the 2015 fiscal year is $496 billion, roughly the same as in 2014 but still lower than had been projected last year. There would also be cuts to some spending on equipment, but Hagel argues the cuts would be more draconian and less strategic if executed under sequestration.

Hagel also announced a series of steps to try to reduce the Defense Department's military and civilian personnel costs, which now make up about half of its spending. While Congress voted to undo cuts to military retiree benefits on February 12, some cuts will still be made to compensation, however the new recommendations do not cut pay. Hagel said the department would slow the growth of tax-free housing allowances, reduce the annual subsidy for military commissaries and reform the TRICARE health insurance program for military family members and retirees.

Hagel cautioned that reducing Army troop levels would increase the risk involved in protracted or simultaneous ground operations, as the US saw during the wars in Iraq and Afghanistan. Hagel said: “As a consequence of large budget cuts, our future force will assume additional risks in certain areas.”

Hagel also raised the specter of disaster if Congress does not reverse sequestration cuts to the military that would set in at deeper levels two years from now.

“Sequestration requires cuts so deep, so abrupt, so quickly, that we cannot shrink the size of our military fast enough. In the short-term, the only way to implement sequestration is to sharply reduce spending on readiness and modernization, which would almost certainly result in a hollow force - one that isn’t ready or capable of fulfilling assigned missions.”

“In the longer term,” Hagel went on, “after trimming the military enough to restore readiness and modernization, the resulting force would be too small to fully execute the president’s defense strategy.”

This is a major change in defense spending and a bit of a gamble in a midterm election year. Defense advocates in both parties will debate the merits of closing bases and idling factories and what benefits must be honored for the troops and their families. And there will be people arguing for cutting the deficit yet arguing for more defense spending.

This is not going to be easy, but to maintain a little perspective, in 2013 the US spent about $680 billion on our military, which works out to 4.4% of GDP. We spend more than any other country. We have about 5% of the world population but we account for 39% of the world military spending. The cutbacks would still leave us spending more than any other country by a long shot. The plan calls for downsizing so we can fight one land war, not two, at the same time. Maybe we could avoid war for a while and really save some money.